How you can use principle of averaging for investing
Averaging For Investing
In this lecture i will discuses on the topic of How you can use principle of Averaging For Investing so read carefully, and follow me on Google News.
Why Does Averaging Work as a Principle?
The fundamental premise in averaging seems should be for an investor that nobody is good at timing the market. That is a tenant one has to accept because over a period of time even the smartest investors figure out that it is impossible almost impossible to time the market perfectly, and therefore no investor should want to deploy all his money are all her money into a stock in one-shot.
Portfolio selection or stock selection is paramount it is most important it should come before averaging or any kind of purchase decision. But having done as the stock selection one should allocate a certain amount of money towards that stock and buy in Lots rather than deploy in a one single shot.
Because buying in a single shot automatically implies that you are a perfect timer of the market and you know the right price for entering the stock since that is impossible to do once you read out what is the equivalent of an SIP approach for mutual funds to buying stocks as well.
Which is buying Lots buy at different price points so that you get a good average entry point at the end of the whole process that is the underlying principle pretty much like SIP of averaging in buying stocks.
Is Averaging Down a Good Investment Strategy?(Averaging For Investing)
Averaging down is very very important and it’s very different from averaging up even psychologically in averaging down and invested has to recognize that for various reasons in the history of a stocks journey. There are moments where stocks go through difficult times and sometimes it is not necessary that a stock goes down because of a wrong step that has been taken by the management or because of poor performance.
Stocks also go up and down because of in the market environment and therefore often you see a stock which is going through a fairly good trajectory in terms of its own individual performance. Actually takes a big correction because the underlying market or the overall market around it is going through a correction.
And that may be a good time for a person who has entered the stock already to buy more of the same stock because nothing is wrong with the stock something is wrong with the market and that is giving your price opportunity to average your price.
So, if you entered at a price of a hundred and you suddenly see the stock at 80 rupees and you buy an equal quantity of that you will get an average price of 90 which is a better enterprise than the hundred that you bought the stock initially add.
However a caveat it is not always right to average a stock on the way down because sometimes stocks go down for very important reasons which may not be apparent to you but is sensed by the market and you find out later that averaging on the way down in the stocks journey was actually a mistake.
So, when you’re averaging on the way down you must be very clear or try to be clear about the reasons why the stock is falling and otherwise averaging down on hindsight might seem like a mistake.
What about averaging up as an Investment Strategy?(Averaging For Investing)
Averaging up is something which an investor finds even more difficult to do than averaging down, at least an averaging down one has the psychological comfort of buying something at a price lower than the initial entry price.which makes a lot of rational sense I’m finding the stock cheaper and therefore I’m buying more of it.
However on averaging up you basically are anchored to an entry price which is lower than the price current market price and therefore it’s like somebody who’s bought a stock 400 and sees the stock at 120 he says the stock is more expensive now than what I initially bought it at and therefore should I be buying it.
But that may be actually a mistake to avoid buying a stock because the price has gone up, what actually happens in portfolio creation is that you initially buy us a selection of stocks and then over a period of time months quarters ears you find that some of the stocks are disappointing you in terms of performance and price performance and someone actually doing better than you thought in terms of actual financial performance and stock performance.
Therefore what smart investors do is sometimes they weed out the stock disappointing stocks and they keep pyramiding or buying more of the stocks which are actually doing well for them in terms of performance and stock price performance. And that is the essential quality of averaging up that you keep buying more of the stocks which are actually working and therefore at the end of a period of many years you have more of the good companies in terms of its portfolio weight rates and less of the companies which are poor quality stocks you.
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